Saturday, April 14, 2007

According to the Sydney Morning Herald a survey in the Fujitsu/JP Morgan Mortgage Industry Report indicated that one-quarter of households has had to reduce spending to pay home mortgages in the bloated property markets of Australia.

The Demographia International Housing Affordability Survey reported earlier this year that housing prices relative to incomes (the Median Multiple) had escalated to more than double the historic norm in all major Australian markets.

The net effect is house price escalation so severe that in Perth, it now takes 11 years of additional pre-tax household income to pay for the median priced house than would have been the case if housing had remained as affordable relative to incomes as 10 years ago. In Sydney, the additional income required is more than eight years, in Adelaide seven years and more than six years in Adelaide and Melbourne.

It should come as no surprise that consumer spending is taking a hit. A household with six to 11 years less income will buy fewer cars, fewer television sets, and less of just about everything. Households simply are not able to spend money that they do not have (or cannot borrow). Taking years of income away to pay for overheated house prices can only hurt the ability can only hobble the economy in the long run, leading to less job creation and less home ownership. Given the wealth creating effects of home ownership, inordinately high housing prices are likely to expand poverty, not to mention the escalating rental prices that must inevitably follow out-of-control land prices.

The housing bubble that has developed in Australia is not to be found everywhere. In a number of US and Canadian markets housing remains affordable, with Median Multiples near or below the historic norm of 3.0. Today, housing prices relative to incomes are little different than a decade ago in these markets. This includes markets such as Atlanta, Dallas-Fort Worth, Houston and Austin, which have stronger demand than any major Australian market, demonstrating that the universally available low interest rates and exotic mortgage products are not the explanation.

The difference, of course, is land use policies. Virtually all of the overheated Australian markets (as well as the overheated markets in other surveyed nations) have development restrictions, in law or practice, which severely ration the amount of land available for new housing. The law of supply and demand makes it clear that rationing supply drives up the price of any desired good or service. And, state land rationing in Australia has driven the price of land up with a vengeance --- at a rate that exceeds any element of the Consumer Price Index. Not even Typhoon Larry could drive the price of fruit up as much as urban consolidation policies have driven up the price of land. Few if any government policies in history have inflicted such horrendous losses on future generations in so short a period of time.

The loss of housing affordability in is about much more than academic discussions of home ownership rates. Rather, it is about the future of the economy and the quality of life in Australia.

Thursday, April 05, 2007

The land rationing policies of the New South Wales Government have resulted in the price of a house on Sydney's outskirts to balloon out at $500,000 each instead of the figure of about $200,000 which it would be if left to market forces. The $200,000 amount is made up of $100,000 to build the house, $50,000 to service the land, $30,000 for land on the outskirts converted to residential and the rest in taxes and miscellaneous. Due to the artificial land scarcity caused by the Government's land rationing, the land component costs ten times as much as it otherwise might be. As a result of these policies many people (especially the young) face the prospect of never being able to own their own home. Wendell Cox's analysis of population movements shows the results of the NSW State Government's foolish strategies:

New South Wales Exodus Continues (31 March 2007)Faced with some of the most unaffordable housing in the world, New South Wales residents continue to move away. According to data just released by the Australian Bureau of Research, 172,500 New South Wales residents have moved to other parts of the nation during the 2000s. This is an annual average out-migration of 24,600, up strongly from the 14,900 annual loss rate of the 1990s (when housing prices were also escalating relative to incomes). Approximately 24,000 people moved away from New South Wales in 2006 to other parts of Australia. Because the Sydney area comprises the majority of the state's population, it seems likely that it has suffered most of the out-migration. The 172,500 loss is larger than the population of the city of Liverpool, one of Sydney's larger local government authorities.

Queensland has been the beneficiary of the New South Wales losses. During the 2000s, Queensland has gained 210,600 internal migrants, an annual average of 30,100. This nearly equals the strong 1990s in-migration, which averaged 31,000 annually.

Outside of Queensland, only Victoria has posted a gain in internal migration during the 2000s, at a modest 4,700. Western Australia lost 4,900 movers to other parts of Australia, though in the last year gained 3,100. Tasmania has lost 1,600 during the decade. More substantial losses have occurred in the Australian Capital Territory (8,800), the Northern Territory (11,800) and South Australia (19,000).